Observations focused on the problems of an underdeveloped country, Venezuela, with some serendipity about the world (orchids, techs, science, investments, politics) at large. A famous Venezuelan, Juan Pablo Perez Alfonzo, referred to oil as the devil's excrement. For countries, easy wealth appears indeed to be the sure path to failure. Venezuela might be a clear example of that.

Archive for January 22nd, 2009

Today, the fate of inflation and future devaluations was sealed when the Government formally announced that it had transfered US$ 12 billion from the Venezuelan Central Bank to the development fund Fonden. Quico has two excellent posts on why this is a huge negative here and here, thus I will not go into the details. It suffices to say that Venezuela’s foreign currency reserves are already at US$ 29.47 billion, while monetary liquidity (M2) at the official rate of Exchange stands at US$ 88.6 billion making the ratio M2/Reserves~3.

I looked at this ratio since 1994 and note that the only time it ever reached 2 before the Hugo Chavez Government was during the worst inflationary period Venezuela has ever enjoyed, which led to a huge devaluation and a very negative period for the Venezuelan economy. The fact that this ratio stands today at 3 is a predictor of another jump in inflation, already above 30%, for 2008 and the need for a devaluation sometime in our near future.